Traditionally, if you want to borrow US$10,000, you first need some assets or money already in the bank as collateral.
A bank employee reviews your finances, and the lender sets an interest rate for the repayment of your loan. The bank gives you the money out of its pool of deposits, collects your interest payments and can seize your collateral if you fail to repay.
Everything depends on the bank: It sits in the middle of the process and controls your money.
The same is true of stock trading, asset management, insurance and basically every form of financial services today. Even when a financial technology app such as Chime, Affirm or Robinhood automates the process, banks still occupy the same intermediary role. That raises the cost of credit and limits borrower flexibility.
DeFi turns this arrangement on its head by re-conceiving of financial services as decentralized software applications that operate without ever taking custody of user funds.